GE Answers Abe’s Call to Spur Funding to Japan Ventures

By Emi Urabe and Rachel Evans -
Aug 14, 2013

GE Capital is answering Prime
Minister Shinzo Abe’s call to increase funding for smaller
companies that can become the next Google Inc.

General Electric Co. (GE)’s financing arm is lending 2 billion
yen ($20.4 million) to a Japanese unit of Imation Corp. (IMN) which
was backed by the data-storage media manufacturer’s inventory
and accounts receivable, according to Clark Griffith, managing
director of structured finance at GE CapitalJapan. This type of
so-called asset-based lending helps small and growing businesses
which have less access to more tangible collateral, such as real
estate and machinery, he said.

“The Financial Services Agency is promoting asset-based
lending as a way to get financing to companies that most need
it,” Griffith said in a telephone interview from Tokyo.
“They’re saying to use asset-based lending for those clients
that you normally wouldn’t be as comfortable extending loans.”

The Bank of Japan in 2011 set aside 500 billion yen for
asset-backed lending and Abe’s Cabinet in June called for
increased funding for smaller companies. Japan’s rate of new
business creation is less than half that of the U.S. and the
Trade Ministry said in May a lack of financing has stymied
growth of startups since 1990. It noted the nation’s largest
online retailer, Rakuten Inc. (4755), has failed to match the scale of
Amazon.com Inc. (AMZN)

Abenomics Effect

“Abenomics policies have already improved the operating
environment at large companies and the benefits are trickling
down to their smaller-sized business partners,” said Renpei
Nakamura, a director of the Association of Asset Based Lending
of Japan. “The demand for this kind of funding at small and
medium enterprises is on the rise.”

Asset-based lending is a method of financing that uses as
collateral a company’s liquid assets, such as aggregate movable
property, inventory collateral and receivables.

Abe’s campaign to end deflation and spur economic growth
backed by unprecedented monetary stimulus has yet to increase
lending to smaller businesses, even as excess cash at Japanese
banks climb to a record. Outstanding loans at SME companies fell
for the sixth straight year to 180 trillion yen last quarter, or
66 percent of the total, according to data compiled by the BOJ.
Borrowings by large enterprises climbed for the second straight
year to 91 trillion yen.

Customer deposits at Japanese lenders exceeded loans by a
record 189.1 trillion yen in June, the BOJ data show. The
funding glut declined 0.6 percent in July, after climbing for
four straight months.

Market Outlook

“Japanese corporates are harder than multinationals to get
over the line because it’s so new to them,” Griffith said.
“What’s helping us is the promotion of asset-based lending by
the FSA. Once the megabanks start offering more conforming
asset-based loans, I think Japanese SMEs will have an easier
time accepting the loan terms and covenants.”

Japan’s ABL market may more than triple to 1 trillion yen
in the “near future,” up from about 300 billion yen now,
Nakamura said. That compares with $620 billion of outstanding
asset-based loans in the U.S. last year, according to data from
Commercial Finance Association.

The country’s corporate bonds have returned 0.09 percent
this month, compared with a 0.25 percent gain for the nation’s
sovereign notes, according to Bank of America Merrill Lynch
index data. Company debt worldwide has lost 0.39 percent.

Resale Market

“In the U.S., inventory used to back the loans is valued
differently because the idea is that it can be auctioned off in
the end,” said ABL industry group’s Nakamura.

The lack of a developed market for the resale of collateral
may hamper the adoption of asset-based lending in Japan,
according to Maoki Matsuno, a Tokyo-based analyst at Daiwa
Securities Co. There’s also a chance market fluctuations can
reduce the value of properties backing loans, making them in
effect unsecured, Matsuno said.

Food products were used to back 98 facilities in the fiscal
year ended March 2012, while farm animals and luxury-brand items
served as collateral in 82 and 20 loans respectively, according
to a data compiled by Mitsubishi Research Institute Inc. (3636)
Instances of borrowings backed by securities alone totaled
2,247, versus 651 which involved movable property, the report
shows.

Imation’s Funding

Imation, which was spun off from 3M Co. in 1996, recorded
losses in the past six years as it transitions away from older
technologies by adding disk-storage products and security
services. The Oakdale, Minnesota-based company last month
reported its net loss in the three months to June 30 narrowed to
$5.1 million, from a $12 million shortfall a year earlier.

The interest rate for an asset-based credit line such as
the one for Imation typically ranges between about 2.73 percent
and 4.23 percent in Japan, Griffith said, declining to give
specific numbers for the deal. That compares with an about 0.52
percent average that the country’s borrowers pay on syndicated
loans, according to data compiled by Bloomberg.

“The corporate mindset right now is more positive and that
always increases the demand for borrowing,” Griffith said.
“The Japanese banks have been slower to adopt the concept of
lending on current assets. We saw this as an opportunity to
bring our expertise to the market and utilize the experience we
have.”